No doubt folks in the cable industry are having a tough time wrapping their heads around the proposed deal between John Malone's Liberty Media and Rupert Murdoch's News Corp. By swapping his 19% stake in News Corp. for a controlling 39% of Murdoch's DirecTV (along with three regional sports networks and cash), Malone, the onetime Supreme Ruler of the Cable Universe who vowed to “crush” the satellite threat, could become the new Satellite King.
Back in the mid '90s, cable guys like Malone regarded satellite as the Death Star. As head of Tele-Communications Inc. (TCI), then the nation's largest cable operator, Malone brought the fight to the enemy, spearheading the digital revolution in cable and making good on his vision of the “500-channel universe.” Now, he's poised to lead the charge against an army he helped build and lead so brilliantly—and ruthlessly—into battle.
Clearly, Malone will score a major financial coup when the ink dries. While Murdoch will no longer have to worry about Malone's taking control of his company, Malone walks away with control of assets worth several times Liberty's initial $1.7 billion stake in News Corp.—and without a multibillion-dollar tax hit in the exchange. Sure, Murdoch will make hundreds of millions and keep News Corp. in the family. But the smart money is that Malone's take ultimately will far exceed his rival's.
The Wall Street wisdom is that Malone is a savvy portfolio manager who knows how to create value that goes far beyond the immediate gains of a deal. As Morgan Stanley savant Rich Bilotti has written in reports since word of the swap surfaced, Liberty will be “the primary beneficiary.”
But just what does Malone see in a satellite operation that Murdoch reportedly dismissed as a “turd bird” three years after buying into it?
Malone has a knack for seeing “opportunity in technology, where others have already given up,” says B&C Executive Editor Mark Robichaux, who chronicled Malone's exploits in Cable Cowboy: John Malone and the Rise of the Modern Cable Business (incidentally, the perfect stocking-stuffer for the industry-obsessed).
Since word first surfaced months ago that Malone was looking to control DirecTV, there has been speculation that he might join forces with Charlie Ergen's EchoStar Dish Network. Or he might avoid the inevitable regulatory hurdles of a merger and simply sell outright to Ergen at a premium. Dish, after all, has a big leg up on DirecTV in its high-definition offerings, as do most cable providers.
With or without an EchoStar play, a Malone-controlled DirecTV—with its more than 15 million subscribers—puts Liberty in a stronger position to launch offshoots of existing networks where it has a major stake. Discovery Communications' family of channels, from TLC to the Travel Channel, as well as home-shopping behemoth QVC, could all get a boost with added distribution clout.
DirecTV subscribers may not be so thrilled, however. Malone ran TCI lean and mean, and the operator always lagged far behind Time Warner, Comcast and Cox in customer satisfaction.
But you can bet that Malone, as always, is plotting several steps ahead in making satellite a credible threat to its cable and telco rivals. Indeed, speculation abounds that a pact with a telco (AT&T is a leading candidate) could result in a suite of consumer services—from telephone to broadband to HD programming—that would surpass in quality and affordability anything currently being offered by cable.
If that happens, the man who led the cable industry to its dominant perch in the distribution game may soon be in the catbird seat when the pendulum swings.
I'm sure Rupert Murdoch can appreciate the irony. The cable industry? That's another matter.
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